Research On The Pricing Of Chinese Collateralized Debt Obligations Based On Vine Copula Model

Since the first modern residential mortgage-backed security was born in the United States in the late 20th century, the securitization had a rapid development around the world. Different from the developed countries, the development of securitization is late and laggard in China. But the credit asset securitization of China will have a rapid development since the China Banking Regulatory Commission and the People's Bank of China streamlined procedures for the issue of Credit asset backed securities in succession last year. A collateralized debt obligation (CDO) is a type of structured asset-backed security, which the collateral of it was generally bonds and bank loans. In China, CDO is the main part of the the Credit asset backed securities market. Since the CDO collateralized of lower-quality subprime mortgages played an important role in the U.S. subprime mortgage crisis, my research focused on the pricing of CDO will be meaningful for the further development of the CDO market in China.In this paper, I introduced the Vine Copula model into the pricing process combined with KMV model, Survival function and Monte Carlo simulation to construct a comprehensive pricing method for the Chinese CDO. KMV model and Survival function are applied to estimate the marginal distribution functions of the default time of individual obligor. The Gaussian Copula, t Copula and Vine Copula functions were used to depict the default correlation between obligors in the asset pool. I simulated the default time from the joint probability distribution function of default time of the whole asset pool which derived from the copula functions, and then, I got the expectation loss of the whole asset pool in the future. Finally, based on the principle of no-arbitrage, I calculated the credit spreads of each tranche in CDO. I also do a sensitivity analysis with respect to the key parameters of pricing model, recovery rate and the tranche structure of the CDO. Furthermore, based on simulation, I describe the risk-return profile of different investors of different tranches. All the research above is accomplished on a virtual CDO which I constructed it used 10 listed companies in Chinese Stock Market. After that, I selected an actual issued CDO in the market, the first phase credit asset backed securities in 2014 of Agricultural Bank of China, and demonstrated that the price through Vine Copula function is closer to actual price than the price through other two Copula functions.